A university student holds a put option for a BHP share with strike price $24 and premium $2. If the spot price at expiry date is $20, she will:
A) let the option lapse and make a loss of $2.
B) exercise the option by buying at $24 and then sell at $20 for a net profit of $2 after allowing for the premium.
C) exercise the option by selling at $24 and then buy at $20 for a net profit of $2 after allowing for the premium.
D) buy at $20 in the spot and then buy an option costing $2 for a net profit of $2.

Question

Quizplus · Accepted Answer

A put option gives the holder the right to sell at the strike price. She can sell at $24 (strike price) and buy at $20 (spot price), making a $4 profit, minus the $2 premium, resulting in a net profit of $2.

A University Student Holds a Put Option for a BHP